Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 437

Are firms perverse to pay dividends?

In the case of Citizen’s Utility (studied by John Long), investors had a clear

choice. They could buy

Class A shares, which paid a cash dividend in each period

Class B shares, which paid an equivalent stock dividend, but could be

converted into class A shares (thus providing an equivalent capital gain)

Class A shares, given the tax argument, should sell for less than class B shares.

In reality, they sold at a premium. No obvious reasons were founds, including

transactions cost or liquidity differences. At least for this stock, investors

seemed to like the cash dividends and were willing to pay a premium for them.